Jim Cramer says to hold on to these 3 cloud stocks and sell the rest

CNBC’s Jim Cramer on Friday offered a list of stock picks for investors who are bullish on cloud computing but cautioned that he believes there’s more pain to come.

“I recommend using this incredible rebound actually as a rare opportunity to sell the weaker cloud stocks into strength,” he said. “That said, some of them might be worth keeping, but only the highest quality names.”

Here is his list of keepers:

1. CrowdStrike
2. Datadog
3. ServiceNow

Honorable mentions, which he likes but doesn’t necessarily recommend buying, include Salesforce and Workday.

To come up with his list, Cramer first looked at the WisdomTree Cloud Computing Fund, an ETF that soared over 13% on Thursday after the October consumer price index came in lighter than expected.

Cramer first narrowed the list of 75 stocks in the exchange-traded fund by eliminating companies with these qualities:

1. Has a market capitalization below $1 billion
2. Is expected to be unprofitable next year
3. Is only tangentially related to the cloud
4. Doesn’t pass the rule of 40 test, meaning the sum of its revenue growth and profit margin is less than 40%

That left him with 13 stocks, and he picked his three favorites.

Cramer maintained that while he likes the stocks he picked, investors should take the chance to exit their cloud stocks while they’re up. “If you were trapped in these things, this is giving you a chance to get out,” he said.

Disclaimer: Cramer’s Charitable Trust owns shares of Salesforce.